AMERICAN UNIVERSITY OF ARMENIA Master’s Essay “Landlockedness as a Challenge for Development: The Case of Armenia” Department of Political Science and International Affairs Student: Narek Harutyunyan Faculty Advisor: Aleksandr Grigoryan Specialization track: International Relations YEREVAN 2015 Acknowledgement I would like to express my immense gratitude to my Faculty Advisor Dr. Aleksandr Grigoryan for his unlimited assistance and encouragement. I am fully convinced that the skills, knowledge and technics that I have learned from my advisor during these months will have their significant contribution to my further professional career. I would also like to thank the whole faculty of the School of Political Science and International Affairs for the huge potential and skills that they developed in me during these two years of study. The analytical and critical skills gained during the study in the program are of highest importance for the academic career in the future. 2 Abstract This research aims to find the main challenges of the landlocked states and identify how the landlockedness affects their development. In this regard, the study uses the following research tools: meta-analysis of the other researches, a two-stage regression analysis of data from World Bank, IMF and UN Datasets, semi-structured in-depth interviews and document analysis of agreements and strategy papers. The findings are grouped in two main parts. The first part discusses the overall development problems of landlocked states, while the second part of the research focuses on Armenia as a landlocked country. The first stage of the analysis shows that the landlockedness creates additional 1070 $ export cost per container. Besides, it identifies that the landlockedness affects country’s development through the export cost by 5.8%. The second part of the research illustrates Armenia’s specific characteristics as a landlocked state. The research concludes that except for several developed landlocked states, their overall level of development is lower than that of the coastal neighbors. The hypothesis is approved because the landlockedness highly affects the export cost and decreases the HDI by 5.8%, which is 1/3 of the HID’s standard deviation. However, the development related issues that Armenia faces are not primarily caused by its landlockedness. 3 Table of Contents Acknowledgement .......................................................................................................................... 2 Abstract ........................................................................................................................................... 3 Table of Contents ............................................................................................................................ 4 List of Abbreviations ...................................................................................................................... 5 List of Tables and Graphs ............................................................................................................... 6 Introduction ..................................................................................................................................... 7 Literature Review............................................................................................................................ 9 Methodology and Design .............................................................................................................. 17 Research Questions and Hypothesis ......................................................................................... 17 Methodology ................................................................................................................................. 17 Problems Faced by Landlocked States: General Overview .......................................................... 20 Empirical Evidence ....................................................................................................................... 25 Defining Variables .................................................................................................................... 25 Regression Analysis .................................................................................................................. 28 Armenia as a Landlocked State..................................................................................................... 34 Conclusions ................................................................................................................................... 46 Bibliography ................................................................................................................................. 49 Appendices .................................................................................................................................... 57 Appendix 1: Countries’ HDI ranking: Average for 2005-2013 ................................................ 57 Appendix 2: Interview Questionnaire ....................................................................................... 65 4 List of Abbreviations FDI – Foreign Direct Investment GDP – Gross Domestic Product GNI – Gross National Income HDI – Human Development Index IMF – International Monetary Fund LLC – Landlocked Countries LLDC – Landlocked Developing Countries PC – Per Capita PPP – Purchasing power parity UNCTAD – United Nations Conference on Trade And Development UN-OHRLLS - United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States USD – US Dollar 5 List of Tables and Graphs Graph 1: GDP of Landlocked states compared to World ……………………………….…….20 Graph 2: Average GDP Per Capita for Landlocked and Non-landlocked states compared to World Average ………………………………………….23 Graph 3: Average HDI for 2009-2013 and Cost to export …………………………………... 29 Graph 4: Average HDI for 2009-2013 and Cost to export …………………………………... 30 Graph 5: Export cost per container in US $ ………………………………………………….. 38 Graph 6: Average % of export products for 2010-2014 ………………………………………40 Graph 7: FDI Net Inflows (% of GDP) ……………………………………………………… 44 Graph 8: HDI for 2005-2013 ………………………………………………………………… 45 Table 1: Average GDP Per Capita of the Landlocked and Maritime States divided by regions ….………………………………………………………. 21 Table 2: The results of the first stage of the regression analysis …….………………………. 31 Table 3: The results of the second stage of the regression analysis ………………………… 32 6 Introduction Even from the ancient times early civilizations were created near the seas or rivers. Since those days, sea transport is considered the cheapest means of transportation. There is no need for the construction of roads in the sea to transport from one place to another. This cheap transportation helps to transfer goods easily and with little cost. Transfer of goods or in other word, trade between the countries is the main indicator of the economic development. Currently around 20% of the states do not have open access to the seas and are considered to be landlocked states. Few landlocked states succeed to overcome the difficulties caused by the fact of not having sea borders and being deprived of this cheap transportation mean. Particularly, these are the European landlocked states, which developed their cooperation with the coastal members and got an opportunity to use their territories as transit easily and steadily without any discrimination or obstacles. A simple glance at the Human Development Index shows that the landlocked economies are mainly concentrated on the lower parts of the index. This suggests that the landlockedness creates specific challenges for the country’s development. Here, a question remains open: how can the landlockedness affect the country’s development? Armenia is among these landlocked countries and faces specific challenges for economic development as well, and, in particular, for international trade, from which the country’s economy is highly dependent. Poor natural resources and absence of alternative transit routes leaves the country with fewer opportunities to develop fully. As a landlocked state, Armenia has a bunch of problems, both specific to the country and general challenges that landlocked economies face. 7 Thus, the aim of the research is to find the answer to the above-mentioned question by finding the path of the impact of having no access to the sea on the country’s development indicators, in particular, in this case on Human Development Index. There are numbers of works done in this topic, however, none of them tried to find the impact of being landlocked on the Human Development Index. The first part of the study is the literature review and the methodological base of the research. This creates a theoretical background for the future analyses. Then, the landlockedness is discussed as a challenge for overall country’s development followed by the econometric analysis of data from the World Bank database. This analysis helps to identify the direct influence of the landlockedness on Human Development Index. In the next stage, the research concentrates on the case of Armenia as a landlocked country and discusses the special characteristics and hardships that the Republic of Armenia face during its economic development. A landlocked, small economy with closed borders with two neighbors and limited opportunities with the third neighbor creates special interest for the analysis. In this part, the study aims to reveal Armenia’s